The Cost of Share Dilution
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- เผยแพร่เมื่อ 5 ก.พ. 2025
- Wallmine link: wallmine.com/u...
Share dilution refers to when a company issues more shares in addition to what's already outstanding, and even though you might not notice a change in the value of your share, it does have a material impact on your holdings. Some share issuances do eventually benefit the investor, others however can be very costly. So let's talk about share dilution it what it means for you, the investor.
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DISCLAIMER:
This channel is for education purposes only and is not affiliated with any financial institution. Richard Coffin is not registered to provide investment advice and as such does not provide recommendations on The Plain Bagel - those looking for investment advice should seek out a registered professional. Richard is not responsible for investment actions taken by viewers.
Happy Friday everyone! What are your thoughts on share dilution? Are you willing to give management the benefit of the doubt, or do you stay away from rising share counts?
Just when is it beneficial to go secondary issues to raise capital vs debt. Is it is good to issue when management thinks shares are overvalued ?
Hi. Could you explain how stock splits would relate to this? Do they add or extract value? Perhaps in a video. Thanks
@@felixrodrigues1157 As far as I know they don't do anything to total valuation hence no dilution. They make stocks in a tradeable range for retail traders to participate.
Can you discuss how exec share issuance and share buybacks all cancel each other and at the end the execs and board of directors just end up richer - what can be done to stop this?
Usually, when I find a small TH-cam channel and think to myself that it's vastly underrated, it ends up being a big TH-cam channel a few months later.
if only we could invest in youtube channels lol
Frieza 223 great idea
@@frieza2235 that would be genius
Subscribed. Everyone should.
You weren’t wrong
Great video! You should do a mini-series on “how to spot bad corporate behavior” and another on “how to spot good corporate behavior”... Kanye another on debt/bonds?? just an idea. Again, great video!
The way that you make these videos is refreshing and calming, there is something just so right about them.
I love the white background, i love the simple clothing, i love the simple editing. It is efficient and elegant.
Thank you for this. This format of filming and editing is the most visually pleasing I have seen on TH-cam.
This is just like how printing more paper money reduces the buying power of your current personal savings. Basically more paper money in circulation means less value each paper money (aka bank note) holds which is basically inflation. Share dilution is basically inflation that reduces the corporate value of your shares.
David Lam imagine that! Inflation destroys value. Who would have thought?
That is a pretty comprehensive way of summarising it.
Thanks ❤
This was really a great context to the share dilution concept. Thanks
lol tell that to the modern economist. Its not reducing purchasing power, its power to the people :D
@@simonl4657 Earlier you used to carry Say 10 units of currency to buy x goods. Now you carry 20 units to buy same x goods. In what universe it is power to people?
I'm studying for the CFA Level 1 exam and this video gave me a new perspective on EPS and diluted EPS. Thanks! :)
I've always wished this system were designed so that a company going public defined only then how many shares exist. They could split the stock, but they couldn't sell a second time existing investor equity.
exactly
Companies would issue more debt to compensate
I get what your saying but from the companies point of view, splitting the stock does not achieve the goal of getting more capital for whatever they are planning to use it for.
people is capital!! split the stock
This is maybe the most useful video for beginning investors I have seen on your channel so far. Sometimes trying to find "good picks" is not so simple. This video gives another way to judge a company's prospects!
You missed 2 (if not more) very important parts! Who decides to issue more shares? Don't the shareholders have a say in this? And what notice does "the company" have to give? Are shareholders able to sell their stock before new shares are created?
I have some limited experience in this. They issue a statement and it happens. That's it. Then stock price goes down.
There's no say in it. Perhaps the board of the company votes on it.
@@humanman usually high percentage owners get to vote
Here in Germany, the shareholders decide on it. They take a vote.
Video topic idea: Discuss closed end funds vs open end funds and how a premium or discount of the the Net Asset Value (NAV) relates to the pricing.
Thank you for creating this channel! One of the few proper investing channels out there. NO PUMP AND DUMP NFT GOLD TEETH JETS BS
Not only are the explanations clear with examples but the animations are on point. Extremely well made video!
you have a great speaking voice. this video set a lot of facts straight for me; thank you
Your chanel is actually really cool, glad I discovered it!
He is the best market teacher actually
Awesome video!
Clear and straight to the point.
Bravo! 👍🏻
I love how you explain things so clearly
Wow this video taught me a lot more than just share dilution.
Loving how deep you’re diving into the details with all this. So much to know and learn! Wondering if you could maybe talk sometime about what it means for an index fund to be “hedged to the Canadian dollar”? E.g. there are two etfs covering the total us stock market, identical but for one is cad-hedged and the other isn’t. Why would someone choose one over the other?
Best channel on TH-cam
I have been wondering about this for ages but never knew what to google!
Thanks for this very important video. It's very frustrating when management uses the share dilution ineffectively with poor, wasteful and ineffective approaches.
Just to pick your brains. If a Company Secretary steps down and a new one comes up is this a potentially bad sign? Shares tanked after this happened. Looking forward to your helpful advice. Thank you very much once again!
Best video I have seen on the topic. Thank you very much, you have a new subscriber!
Love the videos. You should have mentioned buybacks usually have positive tax effects as compared with dividends.
How are we, as investors, going to know if the company is going to issue shares or how the money raised from the new issues is going to be used? Do we need insiders in the company? Are there announcements to investors?
You won't know it ahead of time, but when a public company decides to issue new shares, it'll be public information, and you can see their cash flow statement to see how that money is being used
Love the video. For me the video raised more questions than it answered (in a good way). In short I don't think I understand what a share is. When a company is founded who owns the company? I thought the founders own the company, but your description of how new shares are issued leads me to believe that the company owns the company. When a buyback occurs who is buying back the shares? Do share issuances and buybacks "hurt" and "help" all share holders equally?
If PBC has 100 shares 70 owned by you R, and 30 by me V, and 100 new shares are issued, then the value of our shares has both halved, but effectively you lost a lot more since your ownership fell from 70% to 35% while my ownership fell from 30% to 15%.
Does this mean that larger investors will be more resistant to share issuances? Is it possible to split everyones shares before issuing new shares in order to mitigate this problem? e.g. first split the 100 shares to 200, then issue 100 more shares leaving you with 140 of 300 shares, and me with 60 of 300 shares?
Thanks!
Hi there just came across the channel and loving the simple to understand format and presentation. Can you do a video on quantitative easing please. It's v similar to stock dilution and a lot of people need to understand that it is destroying their purchasing power ultimately
This was a very thorough and informative video. I appreciate it!!!!
Great video, super clear and easy to understand. Congrats!
I enjoyed this video. Very easy to understand.
Awesome 'Dilution Tutorial' with nice and relevant examples! Thank you for sharing knowledge.
Very helpful info explaining clearly this topic that has always been somewhat of a mystery to me. Thank you!
I’ve been wondering what share buyback is
Thanks a lot
This is so great!! Thank you!!! Will you make a video on how long term bond rate moves and why?
Should take about anti-dilution clause.
Also expand on whether the capital raise is in series A, B, C or D etc..
Nice video.
I wonder if companies would be deliberately using share dilution as a way to break away from shareholders' hold on their business, due to internal conflicts of interests?
This sounds a lot like the plot of the Social Network
@@killakam_0923 Really? I watched the film a few years ago, but never understood it this way. Maybe I should have a rewatch... :)
Surely this has to be one of the main reason a company actually cares about its share price
Example #1 for questionable share dilution: Tesla this past quarter. That was a capital raise to just keep the lights on for the year. I hope they can turn things around for all investor's sakes, but I am not touching that one. Also, to be fair, only about 1/4 of that raise was actual stock issuance, most was debt.
Well it looks pretty good now.
lol. do not worry about Tesla. It will be the Apple of the 2030s.
But you hate yourself now lol. $1200 as I write this comment
@@JD-yx7be $2050 now...
@@kaushalmaganti8839 $880 post-split😂
It seems to me that public BDCs and REITs work a bit differently than described here, since they can’t retain earnings and they are typically already levered up into a target ratio range already there’s no real room to grow without fresh shares being sold. Can you maybe talk about how to judge public BDCs and REITs better.
Thank you!!! Great video, it makes much more sense to me now :-)
Helpful video. Can you also do videos on 'foreign excgage hedging' and 'interest rate hedging'? I find those concepts a bit tricky.
Very well explained. Thank you :)
Thanks love these videos. they help alot
Beautifully explained. Very enjoyable
Clear and detailed explanation. Gracias
great video! although i think you are oversimplifying to make a point (which makes sense to keep it simple) but so many companies have done massive buybacks in 2018-19 only to see their share prices continue to sink, while Canopy Growth $CGC your example the stock has actually gone up 10x since 2016. also never heard of wallmine so i will check it out, thanks for sharing!
buybacks are not necesserily good tho.. especially if done right after executives execute their stock options.. In that way the company is paying a high price for their own stock, and selling it at a low price. So, in this case, only the excutives win. A more interesting strategy would be paying dividends for its shareholders for a long and continuous period of time (since they are the true owners of the companies, and not the excutives)
can you do a video on share buybacks?
more precisely: when is it legitimately sound business practice and when is it just a CEO trying to boost the value of his compensation shares?
sounds like a move to buy the stock after the price has adjusted to the dilution and before the potential increase in profits
How can one know that the company is going to issue new shares ?
Is it required to inform shareholders in advance ?
Or are we being screwed first and then informed about it.
Thanks, nice video.
Companies usually make announcements. Shareholders are encouraged to follow these on a regular basis to manage their investments more effectively.
@@nachannachle2706 Thanks.
It should be mandatory.
Well explained! Thank you!
This channel needs more subs!
Thanks for this helpful video!
When Occidental Petroleum acquired Anadarko, Oxy gave Berkshire Hathaway some preferred shares which will dilute our position. We're hoping that the move becomes profitable. We're hoping that Oxy and Berkshire have done their homework and will make us some money eventually.
whats the difference between share dilution and a stock split?
in a dilution how does ownership of the created shares work? 100% of the shares created go to the business or do top execs get to pocket some?
Please talk about Share Rights! They're super rare and I had no info on what to do or why when it happened to me with ACP recently
Thank you very good explanation.
Explained pretty good. Thanku!
Thank you buddy great video
What if they have a target price for example is they're adding 400 million share at the cost of 3 dollars per share but the current price and shares on the public is 1 dollar per share with a 2 million shares?What will happen to their stock?
This channel is amazing.
Share dilution is not always bad, even though there are better methods (like secondary stocks for specific growth aspects, like google did). If the company sells shares, the company puts that money onto its books, which gives it cash flow, which ultimately doesn't hypothetically change the value of the company.....if that money is used specifically for growth and not just to line the pockets of executives, then the value of the company can only go up and hypothetically the price of the stock should also go up (depending on how the shares were "dumped" it could be between a week and a few months before you see a change for positive).
For example, if I have a lemonade stand and sold stock at $1 per share at a 100 stock open while keeping 150 shares to myself, then buying up all 100 shares will put $100 into the company coffers (making the company value $100 out of 250 shares is VPS of $0.40). Let's say that it costs $200 for an automatic lemonade squeezer, so I issue another 200 shares, keeping 100 for myself, in order to raise the company cash flow to $200.....I then purchase the device, which is now inventoried as company asset, making the companies "value" now worth $200 out of 450 shares, which is a VPS of $0.44. Even though I gave myself "free" shares in order to keep more than 50% ownership in the company, the valuation of the company improved slightly. If it causes the business to double its earnings, then the device adds more than its cost in valuation to the company.
Yes, there are companies that use this process to scam shareholders, so OBVIOUSLY it takes a little bit of reading to make sure that these types of dilution actions are not used maliciously.
Very helpful video! Thanks so much!
This sounds anlagous to inflation with shares functioning as currency. If everyone has shares in the company, the shares become effectively worthless. And if you increase the number of shares without growing wealth, the shares become less valuable than they were before.
Dilution does not decrease your ownership in the company. However, it does decrease the value of the share. Supply and Demand principle. The total shares is not determined by the outstanding shares, rather the authorized shares.
Buy back increase EPs. But isn't it consume it profits to increase it claim on a smaller pie? Especially when the price is over valued
In the case of a share issuance (to increase CEO stake in the firm) in lieu of forfeiting certain IP rights & royalties held by the CEO/Founder, there is no visible cash injection to run the business. What does mean to the cost of equity ? Goes up or down?
What exactly is the benefit of buying back shares if you destroy them afterwards? I'd think you would want to hold on to them in order to sell them again when their price has increased.
Can you discuss latest updates to ZOOM (ZM) or the recent ipo of RIVN ?
Is there some limmits or maximums for company to issue new shares?
DRP/DRIP dividend reinvestment is another scenario where companies often issue new shares (and keep the cash)
If they buy back the stock and retire it...does that mean that the eps will do better because there are less shares used in the equation?
Is there any place we can check if the companies are diluting their stocks?
Excellent video Richard!
So should I sell before the company I’m investing in dilutes its shares?
amazing video but can you also make a video on important of lawyers while sign contracts with vc's or other investors with examples
Hold on. Now, as a new comer to investment, I'm confused. So, at IPO, 100% of the company's equity is being sold? I always assumed that it was up to the firm to decide if they were selling 1% of their equity or 100%.
You're right I don't believe owners have to sell all their shares when they IPO!
@@ThePlainBagel So does dilution only happen when the firm already sold 100% of their equity?
@@francisluglio6611 Well not necessarily. Dilution happens when the COMPANY sells more shares than what's already outstanding; in other words, they create new shares and sell them to investors. If the owner IPO'd and kept 30% of the company's shares, those shares aren't new, they are just held by one investor, so the owner then trading those stocks won't cause dilution. If the company issued more shares, we would see dilution, regardless of what the owner does with his/her shares.
Hope that clears things up!
@@ThePlainBagel Alright! Thanks! That clears a ton up!
Great lecture. Thanks
Well done! Thank you.
Do you think the later of your video is what CCL has done this week?
Sorry i don't know anything about stocks but i've been watching your videos and they are really helpful but i still dont know the difference between EPS and dividens?
Great video!
great information , thank you
Very very helpful thank you
Thank you for another very educational video!
I know all this, and that is pretty common and all, but I have trouble understanding hope the heck it's legal, or how come investors don't demand "undillutable" shares. I guess this risk is always priced in but still it feels wrong somehow
Founders will sometimes create different classes of shares that are undilutable (I.e. a class that own 50% of voting rights, or even 100%), but for common shares there’s not much stopping a company from issuing shares. The idea is that market mechanics will punish a company that issues too many shares (price will fall to adjust), but obviously investor enthusiasm prevents a proper price adjustment from time to time.
Just what I needed! I own some IEP
What do you think of TSLA? Are you a Tesla bull or bear?
Would you ask the same question again today?
depends, if tesla is actually consistent with its revenue increase for the next 10 years then im a bull, if not then im a bear
OTC , Pink Sheets do this increase volume since they have in most cases 13B shares O/S .
Great video as always!!
is it the same with class A share?
If the shareholders "own" 100 percent of the company already howcome the company can just issue more shares?
Isn't there also some process where they multiply shares?
My dad had 1.000 shares in something (let's say worth 10 each), but then he was told he now has 10.000 shares, but they're each worth 1.
That's a forward split.
i would love to hear your take on Ocugens (OCGN) situation with increase in authorized shares vote. if you dont know by now they are going to be selling covaxin in the u.s., but they want to increase authorized shares, big red flag to many investors.
What about the company is buying back their own shares at a moment they are over-valued, or worse yet, if they use debt to buy their over-valued shares? :S
That was helpful
When company issues shares you have smaller portion of the company but the company is richer becouse of the money they got from selling the shares. If the company is richer, it should be valued more so you actually didn't lose anything. It is good if company issues share above its value just as it is good when company buybacks shares bellow its value. When company gives shares to executives, it is no loss for you becouse company would have to pay executives with money instead anyway. Losing money of the company is bad for the shareholder so it doesn't matter how it pays them. If it is a good company, they will not overpay executives, sell shares bellow value and buyback shares above value. I know this is rather simplistic but I feel like it should have been mentioned.
Thank you!
Are these share issued out of the company's stock or are they created from thin air?
Thanks for the video!
Unfortunately this video misleads people. Stock buybacks were illegal until Reagan. Why? Because they are manipulating the value of the stock but how? If a company buys back their own stock the ASSUMPTION is that they also retire those shares. This is NOT what has been going on recently. Here's how the game is played: stocks are bought back by the company. Let's say there are 100 shares at $10/share = $1000 total worth. They buy back, say, 50% due to a government tax reduction (this is going on right now today). Now, there are only 50 shares outstanding at a presumed worth of $20/share ($20 x 50 shares = $1000). Sounds great, right? Accept then the company slowly begins reselling the shares at $20 back to the public. Now the value has been artificially ratcheted up. This is why it was and should be illegal. Did the company actually add $10/share value to the stock? No! A company could also retire the shares then issue new shares. It's done ALL the time and has the same affect. Folks it's time for a more "follow the money to it's logical conclusion" approach. BTW for those who will argue this point, review the earnings ratios to stock values over the last 100 years. Or better still tangible holdings (buildings, land, vehicles, equipment) to share value ratio. Companies used to trade at roughly the value of the company's assets or as high as 10 times assets if it were a crazy hot stock. Today, most stocks trade at upwards of 100 times worth (or way more!) A chart will show that this ratio went through the roof from Reagan until today. This stock buyback legalization is why today, when a stock goes broke and it was trading at 100 times worth, your $100/share is not even worth $1/share in reality - see Lehman Brothers. Bottom line: we are where we are at due directly to stock buyback and subsequent re-selling thereof the stocks back to John Q. Public (particularly in a mutual fund in a 401k).
Only open market stock buybacks were illegal. Corporations would have to do a tender offer.